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The Value-At-Risk Estimate of Stock and Currency-Stock Portfolios’ Returns

Jung-Bin Su () and Jui-Cheng Hung ()
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Jung-Bin Su: Department of Finance, China University of Science and Technology, No. 245, Sec. 3, Academia Rd., Nangang Dist., Taipei 11581, Taiwan
Jui-Cheng Hung: Department of Banking and Finance, Chinese Culture University, No. 55, Hwa-Kang Rd., Yang-Ming-Shan, Taipei 11114, Taiwan

Risks, 2018, vol. 6, issue 4, 1-42

Abstract: This study utilizes the seven bivariate generalized autoregressive conditional heteroskedasticity (GARCH) models to forecast the out-of-sample value-at-risk (VaR) of 21 stock portfolios and seven currency-stock portfolios with three weight combinations, and then employs three accuracy tests and one efficiency test to evaluate the VaR forecast performance for the above models. The seven models are constructed by four types of bivariate variance-covariance specifications and two approaches of parameters estimates. The four types of bivariate variance-covariance specifications are the constant conditional correlation (CCC), asymmetric and symmetric dynamic conditional correlation (ADCC and DCC), and the BEKK, whereas the two types of approach include the standard and non-standard approaches. Empirical results show that, regarding the accuracy tests, the VaR forecast performance of stock portfolios varies with the variance-covariance specifications and the approaches of parameters estimate, whereas it does not vary with the weight combinations of portfolios. Conversely, the VaR forecast performance of currency-stock portfolios is almost the same for all models and still does not vary with the weight combinations of portfolios. Regarding the efficiency test via market risk capital, the NS-BEKK model is the most suitable model to be used in the stock and currency-stock portfolios for bank risk managers irrespective of the weight combination of portfolios.

Keywords: value-at-risk; accuracy test; efficiency test; constant conditional correlation; dynamic conditional correlation; stock market (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 M2 M4 K2 (search for similar items in EconPapers)
Date: 2018
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